AI Rotation's Market Breadth Impact, Why Trump Administration Wants Tech to Succeed

Sam (0:02)

It's time now for the big picture. Let's welcome in the team from Charles Schwab, Kasey McCurdy, Chief Portfolio Strategist, Schwab Wealth Advisory, and Alexandra Semenova, Financial Insight Strategist, Charles Schwab. Good morning to both of you. Thank you so much for your time. Happy Friday, we made it. We've got one bell to go on so we can start our weekend. But I do want to start with you, Alex and Chips, because you've been looking at this space very closely. Obviously, we've seen a lot of volatility since the summer, but what are you watching right now?

Alexandra Semenova (0:27)

Yeah, good morning, Sam. Great to be here with you in person.

I would say the AI stories back in the forefront for investors. There are some very legitimate questions about rising debt, financing the AI boom and whether companies can monetize their heavy capital outlays. But it's very important right now to distinguish the long-term opportunity from the high bar that investors have set tactically. When we look big picture, we are still focused on the AI infrastructure as being a key beneficiary of this AI investment cycle.

When you think about AI leadership, there has been abrupt rotations as everyone competes to create the next big chatbot. But underneath the surface, the computing power has been really the constant, and the market has been telling that story all year long. Semiconductors are up 80 percent year-to-date, so there should be some near-term volatility as investors navigate the run-up. But when we think big picture and look out on the long-term, that insatiable demand is going to persist. Of course, that makes the bar very high for earnings come next week and going forward. The expectations from analysts for AI infrastructure profits for 2027 are 63 percent. In July, that number was under 50 percent. Very high bar for companies to deliver on, and we want investors to be selective.

Sam (1:45)

Really good points. Even though we've seen settings lagging this week, you're right. We have seen the analysts turning more bullish, hitting the refresh button on their price target boosts because of the AI-agentic tailwinds that we're hearing from the news, from the dots, certainly for the CPUs. Kasey, I defer to you then. I mean, what's the question to you building this week?

Particularly off the back, if I know it was fresh in everybody's minds just yesterday afternoon, it's only a report at this stage. There seems to be a bit of back and forth as to who's right, who's got the right story at the moment. But with all these questions right now about AI slowdown, OpenAI, how much money it's actually making right now as far as that run rate is concerned, because we've started to see a little bit of an AI unwind yesterday. It seems to scare the markets and hit a nerve.

Kasey McCurdy (2:36)

I've had a number of questions in the past couple of weeks around AI. It's probably the first thing that folks like to ask about.

What I've been trying to highlight is the question of who currently has the most writing on the AI build out. I would suggest considering Washington. I think we've heard about the idea that you don't want to fight the Fed. I would throw out there, we don't want to fight the administration. They are very much geared to this build out succeeding. They want to see that this can increase the US leadership, that it can strengthen growth, and it can make the debt math work a lot better. One of the things I like to call out is when you think about the $40 trillion in debt that we're all knowing and hearing about, there's about four ways that you can solve that problem. One, you can tax, you can increase taxes. Two, you can reduce spending, which that generally gets a chuckle.

Three, you can inflate your way out of the issue. We know that Kevin Worse has at least hiked rates recently, so we can say that there's a little bit of credibility there in fighting inflation. The fourth way is that you grow your way out of that debt, and the AI productivity boom is one way that I think the administration is seen as an opportunity to grow their way out of that debt pile.

Sam (3:51)

Yeah. I mean, Besson has said it himself, hasn't he? Getting back to you, Alex, and the dynamics in these markets right now, I mean, you and I for a number of weeks have been talking about the situation right now, where we've seen this dramatic deterioration in Britain.

We did start to see a little bit of a pickup as far as participation this week. I mean, today looks pretty broad-based as far as the rally. Monday and Tuesday were some fairly good sessions, but something happened yesterday that I thought was really interesting. We had that open AI scare. We had a bid for bonds. We had Trump saying he's not going to bomb Iran before the midterms. And we started to see a big rotation into some of those underperformers, like the Russell 2000, which I know you and the team are looking at very closely as far as small cap underperformance, and some of the more defensive sectors as well. Have you been encouraged by what we've seen this week?